Citi said Friday that the deal for Wells Fargo to acquire Wachovia breached an exclusivity agreement between Citi and Wachovia (see “Wachovia Leaves Citigroup at the Altar“).
On Saturday Citi was granted emergency injunctive relief extending the Exclusivity Agreement between Citi and Wachovia Corp. until further order of the court. According to a press release from Citi, the relief was granted over the objection of Wachovia. Justice Charles Ramos of the Supreme Court of the State of New York issued the order.
Citi said it was prepared to continue negotiations with Wachovia on the parties’ previously agreed-to transaction. Citi re-emphasized in the press release, as it had stated in court filings, that the Exclusivity Agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi.
According to the press release, under the judicial order, Citi and Wachovia must appear before Judge Ramos on Friday, October 10. Citi said it “remains willing to enter into an agreement with Wachovia which Citi believes would deliver powerful capabilities of the two entities to their respective stakeholders.”
In a press release Sunday, Wells Fargo reaffirmed its confidence in the deal with Wachovia, and stated that the firm will go forward with its acquisition plans. “Wells Fargo and Wachovia have a firm, binding merger agreement,’ the release said. “That agreement represents a transaction that, in stark contrast to Citigroup’s proposal, provides significant and certain value to Wachovia shareholders, keeps Wachovia intact, is better for all of Wachovia’s stakeholders including its employees and does not demand financial support from our government. We are confident that we will complete our announced merger with Wachovia. Nothing in the court’s temporary order impacts our ability to ultimately do that.”
Citi to Wells Fargo: Not so Fast
The news of the Wells Fargo-Wachovia acquisition was still ringing in the air—when Citi weighed in last Friday.
“Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia. In addition, Wells Fargo’s conduct constitutes tortious interference with the Exclusivity Agreement,” Citi said in a press release Friday.
That “tortious interference” was a $15.4 billion all-stock takeover bid by Wells Fargo that effectively valued Wachovia at $7 per share and absorbed the Charlotte-based bank and financial services company intact versus a $2.16 billion deal with Citigroup that had been struck earlier in the week.
The Citi deal, which included a provision for the U.S. government to possibly absorb hundreds of billions of dollars in future Wachovia losses (reportedly anything above $42 billion), while leaving behind Wachovia’s retail brokerage, asset-management, insurance, and retirement-services units (see “Wachovia Retirement Stays in Acquisition Deal“). Analysts estimated that shares in the new Wachovia would be worth about $2 each, according to the Wall Street Journal.
The abrupt shift apparently also took government officials by surprise. On Friday the Federal Deposit Insurance Corp. (FDIC) issued the following statement: “The FDIC stands behind its previously announced agreement with Citigroup.” But then the agency also said that it would “be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”
The Federal Reserve also commented in a release Friday: “The Citigroup proposal has undergone extensive review by the Federal Reserve and the Office of the Comptroller of the Currency. We have not yet reviewed the new Wells Fargo proposal and the issues that it raises.” However, the Fed also left a door open, noting, “The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.’
Published reports indicated that the $700 billion federal bailout bill passed by the House of Representatives on Friday and signed into law by President George W. Bush includes a provision suggesting that contracts relating to pending acquisitions in which the FDIC is involved might not “be enforceable.” The WSJ reported that Wachovia signed the agreement with Wells Fargo in part because it knew of the language in the bill, citing “a person close to Wachovia.”
The WSJ reported that Citigroup never signed a definitive merger agreement with Wachovia, and was relying instead on language in a two-page terms sheet. However, Citi said it “was negotiating in good faith and nearly completed the definitive agreements required to consummate the Citi/Wachovia transaction that was announced on Monday [September 29].” Citi also said it had been providing liquidity support to Wachovia Bank since last Monday’s announcement. Reuters reported that Wells Fargo said it has signed a definitive agreement to acquire Wachovia.
Making matters worse, after news of the Wells Fargo move came to light, Citigroup’s stock price fell 18.44%, their biggest one-day drop since October 1987.
It’s not yet what the events mean for retirement plan clients of Wachovia—or the individuals who work there.